Before you sign on the dotted line for the car loan your bank offers, compare your options from a range of car finance brands. There are some incredibly cheap car loans out there, and the key to finding the right one is picking the loan type to suit your financial needs.
Find out what you need to know to compare car finance options and pick the right one for you.
What's in this guide?
- Compare car finance
- How do car loans work?
- What types of car finance are available?
- How can I compare car finance?
- Tips to help you get car finance
- When the cheapest interest rate isn't the cheapest car loan
- How to get a lower interest rate
- Ways you can reduce your monthly repayments
- What you need to apply
- The car finance approval process in New Zealand
- FAQs about car finance
Compare car finance
How do car loans work?
Car loans can work differently depending on what type of loan you take out and what kind of car you’re looking to purchase.
Typically, the following steps apply:
- You apply for finance. Once you choose the right car finance for you, you need to apply. Unsecured loans only require your personal and financial details, but secured loans also need information about the car.
- The lender approves your loan. Car finance approval can happen on the same day, or they may take up to ten days. You may also receive conditional approval, where the lender tells you how much you are likely to be eligible for, so you can go car shopping knowing your spending limitations.
- The car is purchased using the funds. Buying a car can happen a few different ways. If you’re buying the car in a private sale, your lender may pay the seller directly or give you a cheque to pay yourself. If you’re purchasing from a dealership, the lender usually pays them directly. Unsecured loans require you to arrange the payment yourself.
What types of car finance are available?
There are a wide variety of car finance options out there, these are the most common types you’ll come across.
Secured car loan
With a secured car loan, the loan provider uses the vehicle you buy as security for the loan. The lender has the right to repossess the car if you default on your loan. As this type of loan is less of a risk to the lender, the rates for secured loans are usually lower.
Unsecured car loan
With unsecured car loans, the lender doesn’t use an asset as security for the loan, which means they have no asset to repossess if you stop making your loan repayments. These loans come with a higher interest rate, but you have more flexibility with the way you use the loan.
If you’re self-employed and purchasing a car primarily for business use, you can consider a chattel mortgage. The lender you apply with takes out a “mortgage” over the car while you make monthly payments towards the vehicle. Once you pay it in full, the lender removes the mortgage, and you own the vehicle outright.
Car hire purchase
Self-employed borrowers also have the option to finance a car using a car hire purchase. Every repayment made towards a car hire purchase agreement reduces the balance owing to the price of the vehicle. If you’re a self-employed borrower, it’s essential you discuss the different car finance options with an accountant before making a decision.
A novated lease is an option for an employee if they can arrange it with their employer. Primarily, the lender purchases the car, and your employer makes the lease payments on the vehicle out of your before-tax salary, which can potentially help reduce your taxable income, and results in you paying less tax overall. At the end of the novated lease term, you have the option to purchase the vehicle outright for an agreed sum, or return it and upgrade to a different car where you enter into a new lease agreement.
For the self-employed, you can also use a car lease to buy a car for business purposes. The lender purchases the vehicle, and you make regular lease payments until the end of the agreement. A commercial car lease may give you the option to buy the car at the end of the lease term at a reduced price, or you can choose to give the car back and enter into a new lease agreement for a different vehicle.
How can I compare car finance?
Before you apply for any loan, it’s always a good idea to check as many details as you can about the offer. Here are some things you need to look for before you proceed.
- The interest rate. The interest rate charged on your car finance plays a part in how much your repayments are. Always know what rate the lender is offering and take the time to compare car loans from other lenders to be sure the offer is competitive.
- The loan term. Car loans are set over terms as short as one year or for as long as seven years. Some lenders, usually dealership finance providers, give you a set-loan term which comes with a balloon payment at the end. Check if your repayments pay off your loan or if you need to cover more at the end of the term.
- How your repayments work. Ask how often you need to make repayments, how you make them and check if you can make extra payments or repay your loan early without penalty.
- What fees does the lender charge? Some lenders charge a monthly account fee or administration fee on car loans, which may range from $5 per month to $15 per month, depending on the type of car finance you’re applying for. Lenders also charge an establishment fee, usually between $100 and $600.
- Does the lender require insurance? As the lender uses your car as security for your loan, they may insist that the vehicle is adequately insured at all times until you fully repay the loan.
Tips to help you get car finance
Some tips that can help those looking to take out a car loan include:
- Work out how much you can afford to borrow. Before you start looking for a loan or searching for the dream car, work out how much you can afford to borrow. This is based on your income and outgoings. Go through your finances thoroughly and check the maximum amount that you can afford by way of monthly repayments.
- Work out what terms you want from the car loan. You should also consider how long a term you want to repay the loan over before you start searching around for a lender or car. The longer the repayment term, the lower the repayments, but the more the loan will cost you overall in interest payments.
- Extra costs. You need to think about additional costs associated with buying a new car and determine whether this is something that you want to work into the car loan, or whether you want to pay for this separately. This includes the cost of insurance, which can be quite high particularly for younger drivers with less experience.
When the cheapest interest rate isn’t the cheapest car loan
When most people go hunting for the most affordable car loan, they immediately look for a low-interest-rate car loan and believe they’re getting a great deal. Unfortunately, it is possible for the car finance with the cheapest rate to end up costing you more over the term of the loan if you’re not careful.
How the cheapest rate could cost you more:
Consider a car that costs $25,000. One lender is offering a rate of 8% p.a. over five years, and another is offering a rate of 9% p.a. The only difference is the fees. Take a look at how much it could cost you if you opt for the cheapest rate:
|Lender A||Lender B|
|Interest rate||8% p.a.||9% p.a.|
|Loan term||5 years||5 years|
|Monthly account fee||$20||$0|
|Total monthly cost||$532.91||$518.96|
|Total repayment amount||$32,275||$31,588|
In the above example, the interest rate that is higher turns out to be the cheaper option, despite the initial up-front cost.
Make sure you consider all costs before you apply for a car loan and use a comparison rate calculator to determine your repayments.
How to get a lower interest rate
- Be aware of interest rates in the market
Take the time to compare interest rates from a range of lenders, as it gives you plenty of ammunition when it comes to negotiating.
- See if you can negotiate a price with the seller
If you’re keen to stay with your bank or credit union for your car finance needs, take your interest rate information with you when you make enquiries, which encourages the lending officer to see if there is any room to take a few extra points off the interest rate they offer.
- Take out car finance through a dealer
When you apply for a loan through the finance officer at a car dealership, you have plenty of room to negotiate on rates because the dealership often receives their loans at discounted rates, leaving them room to bump up the price you pay. The margin between what they pay to the lender and you pay to them forms their “trail” commission. In other words, every time you make a payment, some of it goes towards paying interest to the lender and some goes to paying commission to the car dealership. Haggle and negotiate on the rates the dealership offers. They usually have about 2% they can drop from the initial rate they may have quoted.
- Can you get a package deal?
Some banks offer a discount on its advertised interest rate if you have other banking products with them. If you already have a mortgage, a credit card and a transaction account with one bank, ask if they will give you a discount on your car finance if you add it to your package.
Ways you can reduce your monthly repayments
It is possible to reduce the payments you make on your car finance each month. The key is to ensure that you’re not paying more than you really should over the entire term of the loan. Here are some ways you can reduce your minimum monthly payments.
- Borrow less
It might sound obvious, but it’s true. If you can borrow even a little bit less on your loan amount, you end up paying less in monthly repayments. Borrowing $5,000 over a five-year loan term adds up to $1,000 per year extra you have to pay back, plus the interest charged on the amount, which adds up to approximately $90 per month out of your pocket.
- Consider a residual balloon payment
When you apply for car finance that has a residual balloon payment at the end of the term, you can drastically reduce your monthly repayments. For example, if you borrow $30,000 and you leave a $10,000 residual balloon payment to pay at the end of the term, the lender calculates your repayments based on the $20,000 you repay over five years, plus interest on the entire $30,000. Bear in mind, you need to cover this residual cost at the end of the term or refinance it with the lender.
- Opt for a longer loan term
If you choose a longer loan term, it reduces the amount you pay each month. Unfortunately, the lender also gets to charge you interest on your debt for an extended period, so you may end up paying far more in interest over the loan term.
What you need to apply
Below is a checklist of some of the information and documentation you may need to supply for your car loan application.
- Driver’s licence OR
- Passport OR
- Birth certificate OR
- 18+ Card
Income and employment
- Three recent payslips
- Two years of tax returns (if self-employed)
- Your after-tax income
- Employment information and contact details
Assets and liabilities
- Details of properties or substantial assets (such as a car) you own
- Your ongoing expenses
- Credit card or store card limits
- Details of loans or overdrafts
- Vehicle make, model, year and colour
- Vehicle identification number (VIN) or chassis number
- Engine number
- Registration number
- Purchase price
The car finance approval process in New Zealand
Getting car loan approval might seem quick, but there are several stages your application needs to progress through before the lender releases money to the car’s seller.
Step one. To start the approval process, you need to fill out and sign an application form, which you can do in person at the bank branch or car dealership. Alternatively, you can fill it out using the lender’s online application form on its website.
Step two. Once the loan provider receives your application, a credit officer reviews it. If everything is in order, you should obtain conditional approval almost immediately.
Step three. The final approval stage is when the lender may request other documentation to support your application, which includes your identification; payslips or income verification; bank statements and any additional pertinent information.
Step four. Once you receive your final approval, the lender asks you to sign the loan documentation, which is your agreement with the bank to repay the amount you’re borrowing over a specified loan term at an agreed interest rate.
Step five. The lender funds the loan, which can happen in a few ways. If the loan is secured, the lender usually pays it directly to the person/dealer you’re buying the car from, or the funds are given to you as a cheque. If it’s unsecured, you usually receive the funds directly and are responsible for purchasing the car.
FAQs about car finance
If you still haven’t found the information you’re looking for, check the FAQs below.
Remember that a car loan can be a significant financial commitment, so exercise diligence and compare a wide range of options before applying.Back to top